Are an ad agency's color separations taxable when sent to an out-of-state printer, and does the client owe use tax on catalogues distributed in New York?

Plain-English summary

Morten L. Coren, P.C. asked about a New York business that hires an advertising agency for print advertising and catalogues. The agency provides consultation, concept development, creative execution, mechanical preparation, and the production of color separations — and sends those separations directly to a printer located outside New York to produce catalogues and print ads. The catalogues are distributed both in and out of New York, and the client itself receives no tangible personal property from the agency.

The Department gave a two-part answer.

• Color separations delivered out of state aren't taxed. New York's sales tax is a destination tax (§ 525.2(a)(3)): the point of delivery controls. Because the agency delivers the color separations to a printer outside New York, its charges to the client for those separations are not subject to New York State or local sales and use tax.
• But the client owes use tax on catalogues distributed in New York. Catalogues are "promotional materials" under § 1101(b)(12), and the distribution of promotional materials within New York is a "use" under § 1101(b)(7). So the client is liable for New York State and local use tax on the total cost of the catalogues that are distributed within New York.

What this means for you

Where the deliverable is delivered controls the sales tax

Producing artwork or color separations for out-of-state printing can keep those charges outside New York sales tax — because the item is delivered out of state, and New York taxes by destination. If the same separations were delivered to a New York printer, the charge could be taxable. Delivery location, not where the client sits, is the hinge.

Promotional materials distributed in New York trigger use tax — on the client

The catch is downstream. Even if the production charges escape sales tax, once the finished catalogues are distributed to recipients in New York, that distribution is a taxable use, and the client (not just the agency) owes use tax on the total cost of the New York-distributed catalogues. Routing production out of state doesn't avoid the tax on in-state promotional distribution.

Split your catalogue costs by where they land

Because only the catalogues distributed within New York are taxed, a business mailing catalogues in and out of state should track the New York share and apply use tax to the total cost of that portion. This mirrors the Department's treatment of coupon-booklet advertising in TSB-A-90(28)S.

Common questions

Q: Are color separations taxable if sent to an out-of-state printer?
A: No. Because they're delivered outside New York, the destination-tax rule means the agency's charges for them are not subject to New York sales or use tax.

Q: So the whole catalogue project is tax-free?
A: No. Catalogues are promotional materials, and distributing them in New York is a taxable "use." The client owes use tax on the total cost of the catalogues distributed within New York.

Q: Who owes the use tax — the agency or the client?
A: The client. It is the one distributing the promotional materials in New York.

Q: What about catalogues distributed outside New York?
A: Those are not subject to New York use tax. Only the New York-distributed portion is taxed.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c) — taxable services, excluding the services of advertising agents
• Tax Law § 1110 — compensating use tax
• Tax Law § 1101(b)(7) — definition of "use," including the distribution of promotional materials
• Tax Law § 1101(b)(12) — definition of "promotional materials"
• 20 NYCRR § 525.2(a)(3) — the sales tax is a "destination tax"

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_26s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90 (26)S
Sales Tax
May 14, 1990

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900312C

On March 12, 1990 a Petition for Advisory Opinion was received from Morten L. Coren,
P.C., 638 Meadow Court, Westbury, N.Y. 11590.
The issue raised by Petitioner, Morten L. Coren, P.C., is whether charges to Petitioner's client
for color separations are subject to New York State and Local Sales or Use Tax, when such color
separations are produced by and delivered by an advertising agency to a printer located outside New
York State?
Petitioner's client operates a business in New York State. It has entered into a contract with
an advertising agency wherein the advertising agency will provide services relating to print
advertising and catalogues. The advertising agency will provide it with project consultation, concept
development, creative execution, mechanical preparation and the production of color separations.
The advertising agency will send the color separations directly to a printer located outside
New York State. The color separations will be used in the production of catalogues and print
advertisements, such print advertisements to be placed in media publications, consisting of
newspapers and magazines. The catalogues will be distributed both in and out of New York State.
Petitioner's client will not receive any tangible personal property from the advertising agency.
Section 1105 of the Tax Law states, in part:
... there is hereby imposed and there shall be paid a tax ... upon:
(a)

The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.

(c)

The receipts from every sale, except for resale, of the following services:

TP-9 (9/88)

(1)

the furnishing of information by printed, mimeographed or
multigraphed matter or by duplicating written or printed
matter in any other matter ... but ... excluding the services of
advertising ... agents ....

(2)

Producing, fabricating, processing, printing or imprinting
tangible personal property, performed for a person who
directly or indirectly furnishes the tangible personal property,
not purchased by him for resale upon which such services are
performed....

-2­
TSB-A-90 (26)S
Sales Tax
May 14, 1990

Section 1110 of the Tax Law states is part:
Except to the extent that property or services have already been or will be subject to
the sales tax under this article, there is hereby imposed on every person a use tax for
the use within this state ... (A) of any tangible personal property purchased at retail,
... (c) of any of the services described in paragraph (1) of subdivision (c) of section
eleven hundred five, and (D) of any tangible personal property, however acquired,
where not acquired for purposes of resale, upon which any of the services described
under paragraphs (2) ... of subdivision (c) of section eleven hundred five have been
performed....
Section 525.2 of the Sales and Use Tax Regulations states, in part:
Nature of tax.
(a)(1) The sales tax is imposed on the receipts, unless specifically exempt, from
every retail sale of tangible personal property, ... from every retail sale of ...
specifically enumerated services.... Each of the various types of transactions has
statutory exemptions, exceptions and limitations.
(3) The sales tax is a "destination tax", that is, the point of delivery
or point at which possession is transferred by the vendor to the
purchaser or designee controls both the tax incident and the tax rate....
(b) The compensating use tax is imposed on the use within the State of tangible
personal property and services which would have been subject to sales tax if
purchased in this State. It is designed to equalize the tax burden and to make the
purchaser of property or services liable for a tax, measured by the purchase price,
where, for various reasons, the sales tax was not paid at the time of purchase. It
protects vendors located in the State from the competition of out-of-state vendors
who are not required to collect tax and makes it unattractive for New York
purchasers to purchase out of the state solely for tax avoidance purposes.
Section 1101(b)(7) of the Tax Law states as follows:
Use. The exercise of any right or power over tangible personal property by the
purchaser thereof and includes, but is not limited to, the receiving, storage or any
keeping or retention for any length of time, withdrawal from storage, any installation,
any affixation to real or personal property, or any consumption of such property.
Without limiting the foregoing, use also shall include the distribution of only tangible
personal property, such as promotional materials.

-3­
TSB-A-90 (26)S
Sales Tax
May 14, 1990

Section 1101(b)(12) of the Tax Law states as follows:
Promotional materials. Any advertising literature, other related tangible personal
property (whether or not personalized by the recipients name or other information
uniquely related to such person) and envelopes used exclusively to deliver the same.
Such other related tangible personal property includes, but is not limited to, free gifts,
complimentary maps or other items given to travel club members, applications, order
forms and return envelopes with respect to such advertising literature, annual reports,
promotional displays and cheshire labels but does not include invoices, statements
and the like.
Accordingly, since the sales tax is a "destination tax", the point of delivery by the vendor to
the purchaser or designee controls both the tax incident and tax rate. The advertising agency's
charges to Petitioner's client for color separations used in producing print advertising or catalogues
will not be subject to New York State or Local Sales and Use Tax when the advertising agency
delivers such color separations to a printer located outside New York State.
However, it is noted that catalogues fall within the definition of promotional materials as
provided under Section 1101(b)(12) of the Tax Law. Since the distribution of promotional materials
within New York State falls within the definition of use as provided under Section 1101(b)(7) of the
Tax Law, Petitioner's client will be liable for New York State and Local Use Tax on the total cost
of the catalogues which are distributed within New York State.

DATED: May 14, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.